Reliance Jio Infocomm’s move to offer a feature phone virtually for free addresses the nearly 50 crore current users of such phones who sit on the fringes of the data revolution sweeping India. The company on Friday announced the launch of such a phone with voice calls for free and unlimited data at Rs 153 per month.

There is a refundable security deposit of Rs 1,500 which the user can reclaim after three years. So in effect, the feature phone user of today can transition to a data addict with minimal monthly investment and no expenditure on buying a new handset.

This single move by Reliance Jio will likely break tariff barriers in India, one of the world’s largest telecom markets, where even today, only one in three users can afford a smartphone. The outliers, the customers who continue with their 2G phones, comprise two of every three phone users in India and they are unable to access data on their current handsets because of exorbitant costs.

With one stroke, not only has Reliance Jio promised a data-filled life for these low-end telecom customers, this single move is likely to also shake up India’s telecom market like never before. Analysts believe this could push at least two big telecom service providers to the fringes of the market, with Reliance JIo and market leader Bharti Airtel remaining as the two strong contenders as smaller telecom companies are already pushed further into oblivion.

Will Reliance Jio’s strategic targeting of the low end of the mobile handset market really impact incumbent operators so drastically? The entry of Reliance Jio in the telecom market with freebies, data and voice for free, last September has already impacted the balance sheet of the incumbent telecom operators quite significantly.

According to analysts at Goldman Sacs, here’s how the average revenue per user (ARPU) of the two listed telecom operators, Bharti Airtel and Idea, fell significantly last fiscal. In both voice and data. Now, with the new offering where a phone is being offered virtually for free with attractive data plans, incumbent telcos seem to be caught unawares. A shakeout will likely happen sooner rather than later.

As per Goldman Sacs, voice ARPU for Bharti Airtel fell from Rs 139 in the first quarter of the fiscal year to Rs 114 in the fourth quarter. For Idea, it declined from Rs 129 in the first quarter to Rs 106 in the last quarter of the fiscal year. The voice business realisation for Bharti as well as Idea fell by almost 18 percent each then. This, when Reliance Jio entered the market only in the second half of the year and had not yet spoken of a feature phone targeting the lower end of the market. During the same period, actual voice revenues for Bharti declined from Rs 10,550 crore in the first quarter to Rs 9,260 crore in the first quarter while for Idea, the figures were Rs 6,790 crore in the first quarter to Rs 5,970 crore in the fourth quarter. Remember, Reliance Jio launched with a promise of free voice for life in September last year.

The decline in data earnings for the two big telecom operators was even sharper last fiscal. Bharti’s data ARPU fell from Rs 202 per month to Rs 162 or by a fifth. For Idea it declined from Rs 142 to Rs 110 per month, a fall of over 22 percent. And total data revenue for Bharti fell from Rs 3,530 crore to Rs 2,750 crore while for Idea this declined from Rs 1,820 crore to Rs 1,460 crore. Blended ARPU (voice + data) for Bharti fell from Rs 196 to Rs 158 per month or by almost 20 percent. For Idea, this decline was from Rs 177 to Rs 142 or also close to 20 percent.

Now that Reliance Jio has turned aggressive about the lower end of the telecom market, these two companies may not be able to escape the heat.

Speaking at the AGM this morning, Reliance Industries Chairman Mukesh Ambani said that feature phone users today cannot avail of any benefits of a smart phone, much less the benefits of a 4G LTE smartphone. They can neither afford the cheapest 4G LTE smartphone nor the “exorbitant” cost of data charged by existing 2G operators.

“It is both unjust and ironic that 50 crore Indians with feature phones pay more for voice calls and SMSes than those with smartphones. They end up spending their entire month’s telecom budget of Rs 150-200 only to get 150 minutes of voice – while their smartphone counterparts on Jio network get voice for free. Even today, they have to pay between Rs 4,000 to Rs 8,000 for every GB of data – while their smartphone counterparts on Jio get data for Rs 10-20 per GB. If these feature phone users were to consume a similar quantity of data as smartphone users, they would spend over Rs 4000 per month at the prevailing 2G data rates,” Ambani said.

He continued, saying even an entry-level smart phone costs between Rs 3,000-4,500 making it unaffordable for feature phone users to upgrade to a smartphone. So the JioPhone comes virtually for free; voice will always be free. Ambani said currently, feature phone users are charged Rs 1.20 to 1.50 per minute for basic voice calling which takes their monthly expenditure to Rs 150 – 200 for just 150 minutes of basic voice. What Reliance Jio is promising is unlimited voice and data offering for just Rs 153 a month. There is a catch though. The data usage will be capped at half a GB per day. Also, the Rs 1,500 refundable charge means the users will be tied to Reliance Jio services for 36 months. To make things even easier, Reliance Jio has promised two sachets – a weekly plan for Rs 53 and a 2-day plan for Rs 23 – for those who do not want to even spend Rs 153 each month.

An analyst who tracks the telecom market closely said the deal accompanying the Jio Phone will earn Reliance Jio Rs 90 in ARPU per month (calculated on net present value method). “This is of course far better than the average ARPU on such phones now which is almost Rs 70. RJio has additionally locked customers in for three years. It is a good deal for RJio. This move will completely change the telecom market since incumbent telecom companies may be unable to compete either on network quality or on affordable competing devices.”

Ambani’s emphasis on transitioning the Indian phone user – whether she uses feature phone or a smart phone – is borne out by, well, data. Some months back, analysts at a brokerage had said they expect growth in voice revenue for telecom service providers to decline at 0.5 percent CAGR over the next five years. During the same period, however, non-voice revenues should grow at 21 percent per annum, driven by 26 percent growth in internet data revenue. The rapid growth in data is likely to impact voice usage – a trend that has played out in every major telecom market around the world.

In FY15, India’s telecom industry was overwhelmingly voice, with voice revenue accounting for 80 percent of industry’s total revenue. This declined to 74.3 percent in FY16; remained more or less stable in FY17 at 73.45 percent but over the next three years, voice revenue is projected to decline significantly. Voice revenue for India’s telecom warriers will fall below the 70 percent mark in FY18 (at 69 percent of total industry revenue). In FY19, voice revenue is projected to be less than a third at 61 percent and will fall further to just a little over half of industry’s total revenue or 56 percent in FY20. So by the turn of this decade, a little less than 50 paise of every rupee generated in India’s telecom market will come from data and other non-voice revenue streams.

To enable all variety of phone users to use data, the only possible solution is an affordable feature phone with 4G services. Reliance Jio seems to have got this bit just right.

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